Israeli Inflation Expected to Drop Sharply Tomorrow, Yet Bank of Israel Holds Interest Rates

Israel's annual inflation rate is forecasted to fall dramatically to about 1.5% tomorrow, Wednesday, based on June's consumer price index data. Banks and investment houses predict a negative inflation rate for June, between -0.1% and -0.2%, influenced mainly by lower airfare prices due to resumed flights, a 27-agorot drop in fuel prices per liter, and cheaper clothing and footwear. However, rising housing rents and increased food prices announced by various companies will partially offset these declines.

Despite this expected sharp drop in inflation from the current 1.9%, the Bank of Israel is not expected to cut interest rates again immediately. The central bank already factored in the anticipated inflation decrease when it reduced the base interest rate by 0.25% last week to 3.5%, with a prime rate of 5.0%. Experts forecast one or two more rate cuts over the next six months, potentially by the first quarter of 2027.

This cautious approach is partly due to higher inflation readings in July and August of last year (0.4% and 0.7%, respectively), which will keep the annual inflation rate from falling too quickly. The outlook suggests inflation could approach 1% annually in the coming months for the first time in years, but the Bank of Israel is balancing this against economic conditions before making further rate adjustments.